Lessons in computing returns – V The Rule of 72
by J Victor on August 1st, 2010Hi ,
So we were playing some games with percentages in the last few posts.
In this article, let me introduce a short cut – an approximately 500 year old formulae to help you in your calculations Rule 72.
For those who love math and accountancy, the rule 72 may not be new. Luca Pacioli (1445–1514) , in his book ‘summa de arithematica’ discusses the rule when he talks about the estimation of the doubling time of an investment. However, it’s not Pacioli who invented this rule.
RULE 72
The rule is very simple – Divide 72 by the Interest Rate. What do you get?
You get the number of years it would take for your investment to Double. Practical, very simple. The Rule of 72 is not absolutely precise, but it gives you a practical estimate that you can work out in your head.
Example 1.
You go into a bank that offers 9.50% annual interest on your FD. How many years will it take for your capital to double?
It’s Simple Divide 72 by 9.50. Roughly 7 and half years.
Example 2.
At what rate should you invest to double your money in 5 years?
Divide 72 / 5 . The answer is 14.40%. so if you can manage to get 14.40% return on your investment, your money doubles in 5 years.
Example 3.
The rate of interest you pay for your credit cards is 24%. Your credit card liability is Rs 25,000. What happens if you keep paying your minimum due for 3 years?
In 3 years (72/24), you end up paying Rs 25,000 as interest alone. You’ll still have the Rs 25,000 liability remaining.
Example 4
You read from papers that the country’s GDP grows at 7% a year. How long would it take the economy to double it’s growth?
The answer is (72/7) 10 and 3 months approximately.
Example 5.
The inflation rates are at 9%. What the effect of it on your money?
Your money will lose half its value in 8 years ( 72/9)
Example 6
At 8% interest your money would double in (72/8) 9 years. If you decide to remain invested for 27 years, a small deposit of Rs 50,000 would become Rs 400,000!
Not only in years, can you apply this rule in any time frame.
So that’s Rule 72. Nice little mathematical formula that helps you to take financial decisions. The rule is not perfect and it does not account for taxes.
Till my next post …..
……..Have a nice day!
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3 Responses to “Lessons in computing returns – V The Rule of 72”
Loradae
September 21, 2011 at 12:12 pm
If not for your writing this topic could be very cvnooluetd and oblique.
Jeana
November 4, 2011 at 5:50 pm
Going to put this atrcile to good use now.
Roshni
December 29, 2013 at 10:32 pm
Good examples. Helps understand better. Thanks.